This week, it's all about the Fed

The major indexes finished higher last week amid further optimism of the Fed pausing. The equities markets starting the week by rallying Monday, but suffered a downside reversal when CNBC irresponsibly reported that Fed Chair Bernanke suggested he was misunderstood at last week's testimony.  However, there was little in the way of downside follow-through on Tuesday, which allowed the bullish camp to again rebuild hopes of the Fed pausing.  A weaker-than-expected Employment report on Friday triggered a sharp move higher that seemed to be based on the belief that the Fed will announce they plan to pause as early as Tuesday's FOMC meeting.  Technology shares underperformed once again, as market players continued to favor selective blue chip names.  This allowed the Dow and S&P 500 to breakout to fresh multi-year highs.

This week will be all about the Fed, as the FOMC meeting is scheduled for Tuesday.  Overall, the markets now appear to be expecting a rate hike followed by language which indicates that the Fed plans to pause.  Anything less than decisive language about a pause likely won't be taken well.  Because of the elevated level of commodity prices and the strong growth globally, it could be a stretch for the Fed to commit to a pause.  Furthermore, recent data has also indicated that inflation could be making its way into wages again, which makes it even tougher for the Fed to limit future rate hikes.  It's also important to note that just because possible language is provided that leans towards a pause, that doesn't mean we have seen the last of the Fed during this tightening cycle.  If Greenspan and Co. is any meter to measure by, Bernanke and his band of merry Fed governors aren’t even close to being done.  Also, with how well the major indexes have acted recently, a possible dovish Fed statement could be largely discounted already, and we could see a “sell the news” scenario.  Stay tuned!

Daily Pivot Points for 5-8-06

Please feel free to email me with any questions you might have, and have a great trading week!

Chris Curran